Fire in the (Jackson) Hole
Understanding Friday’s market sell-off
No shift towards a dovish policy
Jerome Powell's speech last Friday had a huge impact on the markets:
- The FED Chairman stated that the fight against inflation will be the priority, even if it means sacrificing the economy.
- Market participants were expecting a hint towards a more accommodative monetary policy, but the speech denied these dovish expectations.
- This triggered a sharp sell-off in risky assets, which was accentuated by the low liquidity due to the summer holidays.
The FED’s intentions were indeed clearly stated in this announcement:
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
Black Friday?
The recent "summer rally" has been slightly tempered by this latest announcement.
This seems to be a confirmation that liquidity is the number one factor driving the market now:
- From July 25, the week in which the largest companies released their Q2 results, until last Friday, the S&P 500 was only up 2%.
- Friday's correction wiped out a large part of the mini rally following the reassuring Q2 results of the largest US companies.
- Following Saudi Arabia's announcement of a possible production cut, the only risky asset to rise was oil.
Markets have updated their rate forecasts
In the previous newsletter we discussed how the FedWatch tool works and how volatile it could be:
- Market participants have moved from an expected rate hike of 50 to 75 bps.
- Currently, the market is pricing in a 65.50% chance of a 75 bps hike at the September meeting, up from 40.50% two weeks ago.
Conclusion
Friday's events are another reminder that the Fed is currently the main driver of the market.
There are several important data releases coming up, including Non-Farm Payrolls (September 2) and August CPI (September 13), which could influence the September decision.
However, one topic that has been getting a lot of attention lately is the price of electricity in Europe.
We will come back to this in our next newsletter.
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
Keep an eye on FOMC opportunity
Find out how FOMC meetings can affect the markets ahead of the next one on 15-16 September 2020.
- How might the next Fed meeting impact your trading?
- What was decided at the last Fed meeting?
- How does the FOMC announcement usually affect the dollar?
Live prices on most popular markets
- Forex
- Shares
- Indices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.